Chesapeake Energy shares catch 12% boost

Natural-gas giant caught by downdraft

By

SteveGelsi

NEW YORK (MarketWatch) -- Chesapeake Energy Corp. shares caught a break upward on Thursday as reports of interest in assets from oil major BP PLC pumped up the stock by about 12%, along with the disclosure of a fresh $750 million line of credit.

The move $2.01 move up by Chesapeake stock to close at $18.35 marks a ray of light in a dark month for the largest producer of natural gas in the United States, lately a candidate to become a major poster child in the energy bust of 2008.

Rocked by plunging natural-gas prices, tight credit markets, an expensive capital program and slack demand, Chesapeake has seen its fortunes take a turn for the worse.

Once rewarded for spending heavily on capital improvement and drilling oil wells, Chesapeake
CHK, -1.63%
now finds itself slashing its drilling budget by $5 billion over the next two years, which is adding to bearish sentiment in the hard-hit sector for oil services.

Now, with stock prices of Chesapeake and other energy companies depressed, shareholders are worried that any larger players could swoop in and buy assets on the cheap.

Since June 30, the Amex Natural Gas Index
XNG, -2.55%
of major producers in the United States has fallen from a record of 776 on July 2 to the 350 level now, giving up 55% of its gains as oil broke below $70 a barrel and U.S. equities turned in their worst week in history in recent days.

Petrohawk Energy Corp.
HK, -4.72%
even went far enough to adopt a so-called poison pill to stave off hostile bids at cheap stock prices. Petrohawk Chief Executive Floyd Wilson bemoaned the current "disconnect between any reasonable valuation of our assets and current stock-market values."

The poison pill signals the growing expectation of dealmaking in the natural-gas sector, which saw a move upward Thursday on reports that BP
BP, -1.85%
may scoop up assets of Chesapeake, according to a report in The Wall Street Journal.

The Amex Natural Gas Index of leading producers rallied 10% on Thursday, leading gains throughout the energy sector. See full story.

A star loses its shine

As recently as this summer, Chesapeake Energy was riding high on the back of record energy prices and in its role as a sorely needed domestic producer helping to stave off imports.

Along with rival XTO Energy Inc.
XTO, -0.62%
Chesapeake was the headliner at the biggest-ever meeting of the Independent Petroleum Association of America, the organization known for representing the once-billed wildcatters of the Midwestern energy boom.

Just a few months ago, the industry couldn't get enough drills into the ground fast enough, and capital was more than plentiful to develop natural-gas properties in various shale plays around the country. See full story.

Aubrey McClendon, Chesapeake's founder and chief executive, jumped to No. 134 on the Forbes list of richest Americans with a net worth of $3 billion. He coordinated an energy independence campaign with T. Boone Pickens that took root this fall, and even took a minority stake in the Oklahoma City Thunder, the NBA team moving from Seattle to the energy capital.

Last Friday, McClendon sold nearly all his holdings in Chesapeake -- more than 30 million shares -- to cover margin calls. The stock fetched prices ranging from $13 to $24 a share, a fraction of the stock's lofty heights of $65 a share over the summer.

All told, Chesapeake is banking on $2.5 billion and $3 billion by the end of the year through asset sales and other financial deals.

McClendon had plenty of company. Analysts at Houston research firm Tudor Pickering Holt said stock and energy asset sales by executives in recent days have also involved shares of

"Some investors are angry for the forced selling and some are questioning executive judgment," Dan Pickering of Tudor Pickering Holt wrote to clients, but he said that energy chiefs can't take all the blame.

"The entire market was overleveraged or overinvested, and practically everyone [is] doing some forced selling. Energy execs just have to publicly throw egg onto their own face, while the rest of us do it without press releases."

In meetings with Wall Street analyst this week, Chesapeake management pointed to asset sales as a balm to any abrasions tied to insufficient liquidity.

McSpirit said Thursday he currently favors Petrohawk Energy and Southwestern Energy Co.
SWN, -2.91%
as names that "possess greater financial flexibility and that don't depend on asset divestures and or offer greater per-share exposure to emerging-resource plays."

As for oil major BP, any fresh acquisition with Chesapeake would mark the latest in a series of deals this year, spending a combined $3.65 billion to acquire fields in Oklahoma and a 25% stake in another field in Arkansas.

A Chesapeake spokesman told The Wall Street Journal that the company wants to sell a stake in a Pennsylvania gas field similar to the Arkansas deal, but declined to comment further.

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